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Leading healthcare information technology (HCIT) solutions provider Cerner Corp (CERN - Analyst Report) reported second quarter earnings per share of 56 cents, beating the Zacks Consensus Estimate of 51 cents and surpassing the year-ago earnings of 42 cents per share.

Net income rose 35.8% year over year to $97.8 million due to buoyant bookings and increased customer base.

Revenues

Revenues in the second quarter climbed 22% year over year to $637.4 million, marginally beating the Zacks Consensus Estimate of $637 million.

Revenues increased on the back of Support, Maintenance and Services (up 19.9% to $426 million), robust System sales (up 24.2% to $195.3 million) and higher revenues from Reimbursed Travel up 36.3% to about $16.0 million.

Bookings and Revenue Backlog

Bookings came in at $700.5 million, up 8% year over year, a record high for the company in any second quarter. Total revenue backlog came to $6.51 billion, up 20% year over year, including $5.80 billion of contract backlog and $714 million of support and maintenance backlog. 

Margins

Gross margin in the quarter declined to 76.9% from 81.2% in the prior year quarter. Operating margin increased to 21.4% from 20.6% a year ago.

Balance Sheet & Cash flow

Cerner ended the second quarter with cash, cash equivalents and short-term investment of $980 million, up 43.7% on a year-over-year basis. Total long-term debt and other obligations increased 48.4% year over year to about $126 million.

Cash flow from operations was $182.8 million in the quarter, up 49.7% year over year. Free cash flow was $107.3 million, up 50.6% year over year.

Outlook

For the third quarter of 2012, the company forecasts revenues in a band of $635 million and $655 million and adjusted earnings per share before share based compensation expense, in the range of 57 cents to 59 cents. Fresh bookings are estimated between $710 million and $750 million. Cerner expects stock-based compensation to be dilutive to its earnings by about 4 cents for the third quarter.

For 2012, the company increased its forecast revenues in the range of $2,575 million and $2,625 million compared with the earlier range of $2,525 million to $2,600 million.  The company also increased its expected adjusted earnings per share, before share based compensation expense, to be in the neighborhood of $2.32 and $2.36 compared with the earlier range of $2.25 to $2.32. Cerner projects stock-based compensation costs to dilute 2012 earnings by about 13 cents to 14 cents.

Cerner remains the trend setter among pure-play, publicly traded healthcare IT (HCIT) vendors. We believe Cerner has positioned itself as one of the better placed clinical technology vendors to benefit from high HCIT spending over the next few years. The company is diversified not only on a global basis but serves both hospitals and ambulatory outfits. Its integrated solutions have captured market share.

We believe long-term investors may consider Cerner, which serves a sizeable installed hospital base. It requires composite clinically-focused applications complying with ‘meaningful use’ requirements, reimbursement problems and complex coding challenges. The company has long-standing, integrated and seamless solutions for both inpatient and ambulatory settings.

On the negative side, the federal Stimulus program will gradually wind down. Cerner faces stiff competition from established HCIT players, such as Athenahealth (ATHN - Analyst Report), Allscripts-Misys (MDRX - Analyst Report) and Quality Systems (QSII - Analyst Report) and many others in a crowded field. The company is developing multiple growth drivers which will ensure its future growth.

We have a long-term ‘Outperform’ recommendation on Cerner. The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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